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Factor Investing Portfolios - CIOs’ Investment Strategies: Q&A

Q1 / How could investors play the 2018 investment outlook through risk factors?

Factor strategies may enable investors to implement their market views in both a very transparent and cost-effective manner. There is indeed a strong relationship between factor performance and market/macro conditions. An investor with a central scenario focused on GDP growth and accommodating monetary policy could, for example, implement a Value and Momentum programme. However, investors should focus on diversification between rewarded risk factors, so they would complete their allocation with factors such as Low Vol and Quality in order to reduce drawdown potential. Low Vol and Quality would also have the benefits of providing a hedge against a possible return of market volatility. For 2018, it will be important to closely monitor the valuation level of the different factors, in order to avoid any potential overheating. Typically we can notice that the Momentum factor has been favoured by investors in 2017 both in Europe and US for its pro-cyclical stance. However an extended outperformance of the Momentum factor can lead to prices exuberance and tensed valuations. Any materialisation of risk could trigger a quick factor rotation that would negatively affect the performance of Momentum portfolios.

Q2 / What are the main areas of attention?

With a central scenario of GDP growth and accommodative monetary policy, keeping an exposure to equities makes sense. However, equity markets have been gaining quite steadily over recent years, with very low levels of volatility. As such, it is crucial for investors to consider asymmetrical strategies that would outperform if and when volatility returns.

Another source of attention is the growing materialisation of ESG risks and their faster impact on companies’ share prices. The best example is the impact of the emissions scandal on the car manufacturing sector. Moreover, we note an increasing amount of regulation and market initiative to tackle climate/environmental issues.

We are seeing investors’ demand for ESG criteria to be considered being increasingly accommodated, in their passive and factor portfolios – which is a good illustration of how key these risks are becoming for asset owners. Such a trend may contribute to improving company behaviour and as we see it probably fuel a virtuous circle.